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'AAAm' Local Government Investment Pool Trends (Second-Quarter 2023)

Index name 7-day net yield (%) 30-day net yield (%) WAM-R (days) WAM-F (days) Total net assets (bil. $) 'A-1+' : 'A-1' credit quality (%)
S&P Global Ratings ‘AAAm’ government LGIPs 5.04 5.02 24 77 80.8 99:1
S&P Global Ratings ‘AAAm’ prime LGIPs 5.22 5.19 36 74 244 64:36
LGIP--Local government investment pool. WAM-R--Weighted average maturity to reset. WAM-F--Weighted average maturity to final.

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The 'AAAm' local government investment pool (LGIP) trends report shows metrics of U.S.-domiciled LGIPs that seek to maintain principal value ($1.00) and limit exposure to principal losses due to credit risk. The LGIPs featured in this report all conform to our principal stability fund ratings (PSFR) criteria.

In our rating analysis, we emphasize the net asset value (NAV) per share, 'A-1+' credit quality, weighted average maturity to reset (WAM-R), weighted average maturity to final (WAM-F), net asset trends, and the underlying composition of LGIPs. For more, see the "'AAAm' Local Government Investment Pools" section at the end of this report.

U.S. LGIPs' Assets Plateaued In The Second Quarter Following Strong Growth

Prime LGIPs' assets rose slightly in the second quarter, to $244 billion, from $235 billion the prior quarter, while government strategies saw outflows of $6 billion to finish the second quarter at $81 billion. Together, these equate to a 0.9% increase in total prime and government assets. (Prime LGIPs are those that have the ability to invest in corporate credit securities--similar to prime money market funds.)

Outflows and slower growth are common in the second quarter owing to the cyclical nature of LGIPs. But overall asset growth in 2023 has been robust, generally attributed to improving tax receipts and competitive returns over money market funds and bank deposits.

Chart 1

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LGIPs Are Providing A Competitive Rate Of Return Relative To Bank Deposits And Money Market Funds

Following the U.S. Federal Reserve's 25-basis-point interest rate hike in May 2023, LGIP seven-day yields broke through the 5% barrier (see table 1). In our view, LGIPs continue to provide a rate of return that can compete with institutional money market funds and interest on bank deposits.

Table 1

'AAAm' LGIPs' seven-day net yield (%)
Index Jun-22 Sep-22 Dec-22 Mar-23 Jun-23
S&P Global Ratings ‘AAAm’ government LGIPs 1.24 2.77 4.15 4.7 5.04
S&P Global Ratings ‘AAAm’ prime LGIPs 1.38 2.81 4.38 4.84 5.22

Conservative Management Continued To Mitigate Price Volatility, Providing A Consistent NAV Per Share

The net asset value (NAV) per share averaged 0.99988 in the second quarter of 2023, about 23 basis points higher than our lowest NAV threshold of 0.9975 for 'AAAm' rated PSFRs (see chart 2). Notably though, managers have continued to follow a prudent investment focus, navigating the rapid interest rate moves with measures to reduce portfolio hazards and improve liquidity.

Chart 2

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LGIP managers continue to concentrate on the Fed's interest rate policy when developing investment strategy. Recently, uncertainty around the debt ceiling faded as the limit was raised through early 2025. Banking sector volatility still raises concerns for investors, leading to a continuation of high credit quality positioning. Government-focused LGIPs, on average, had 68% of their assets maturing weekly in June 2023. Considering maturity extension, prime LGIPs experienced a slight decline in weekly liquidity, dropping to 40% from the previous quarter's 45%.

Chart 3

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Weighted Average Maturities Started To Increase In The Second Quarter

The increase in weighted average maturities--a key indicator of interest rate risk--can be attributed to managers predicting a nearing conclusion to rate hikes (see table 2 and chart 4). On average, government-focused LGIPs had a weighted average maturity (WAM) of 24 days in June, up from 17 days in the first quarter. Prime LGIPs averaged a 36-day WAM in June, an increase from 30 days.

The rise is noteworthy, especially when considering the substantial WAM declines in 2022 on the back of a dramatic increase in inflation prompting aggressive actions from the Fed. When rates peak, a further extension of WAMs is likely.

Table 2

'AAAm' LGIPs' weighted average maturity (in days)
Index Jun-22 Sep-22 Dec-22 Mar-23 Jun-23
S&P Global Ratings ‘AAAm’ government LGIPs 24 21 13 17 24
S&P Global Ratings ‘AAAm’ prime LGIPs 29 24 26 30 36

Chart 4

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Chart 5

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Economic Updates

The underlying instruments in LGIP portfolios are generally high credit quality ('A-1' or higher) government, agency, and bank investments (see table 3 and chart 6). Recognizing this, we cite some of the key takeaways from recent reports: "Strong U.S. Jobs Report Makes A Rate Hike All But Certain In July," July 13, 2023, and "Economic Outlook U.S Q3 2023: A Sticky Slowdown Means Higher For Longer," June 26,2023.

  • S&P Global Ratings' economists do not expect any more rate hikes in 2023, which is consistent with their forecast for below-potential economic growth.
  • The U.S. economy maintains its resilience of the past few quarters, despite sharp rises in policy rated and standard recession indicators.
  • S&P Global Ratings' economists expect real GDP growth will slow to under 1.0% in the second half of the year, half the rate expected in the second quarter, amid a material and broad-based decline in domestic demand growth.

Table 3

'AAAm' LGIPs' 'A-1+' credit quality (%)
Index Jun-22 Sep-22 Dec-22 Mar-23 Jun-23
S&P Global Ratings ‘AAAm’ government LGIPs 98 98 99 99 99
S&P Global Ratings ‘AAAm’ prime LGIPs 68 72 67 66 64
LGIP--Local government investment pool.

Chart 6

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Chart 7

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Chart 8

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Table 4

'AAAm' LGIPs--top 10 by assets
Principal stability fund rating Local government investment pool Net assets (mil. $) --Portfolio maturity (days)-- 'A-1+' credit quality (%) NAV per share
WAM-R WAM-F
Government LGIPs
AAAm TEXPOOL 30,153 24 91 100 0.99990
AAAm North Carolina Capital Management Trust - Government Portfolio 17,787 23 75 100 1.00018
AAAm Texas Short Term Asset Reserve (TexSTAR) Cash Reserve Fund 10,495 22 49 100 1.00005
AAAm New York Cooperative Liquid Assets Securities System (NY CLASS) 8,622 32 73 100 1.00010
AAAm Lone Star Investment Pool - Government Overnight Fund 5,574 23 96 97 1.00021
AAAm Pennsylvania School District Liquid Asset Fund - Max Series 2,414 22 30 100 1.00004
AAAm Texas Cooperative Liquid Assets Securities System (TX CLASS Government) 1,371 26 83 100 1.00001
AAAm New York Liquid Asset Fund - MAX Portfolio 1,323 17 18 100 1.00006
AAAm New Jersey Asset & Rebate Management Program/Joint Account 997 29 91 93 1.00000
AAAm Nebraska Liquid Asset Fund 768 28 91 96 1.00005
Prime LGIPs
AAAm Texas Cooperative Liquid Assets Securities System (TX CLASS) 22,463 45 80 57 0.99985
AAAm State Treasury Asset Reserve of Ohio (STAR OHIO) 22,048 37 62 62 0.99981
AAAm Florida PRIME 21,785 33 80 59 0.99991
AAAm Connecticut State Treasurer's Short-Term Investment Fund 19,045 41 98 83 0.99922
AAAm California Asset Management Trust/Cash Reserve Portfolio 14,798 27 60 50 0.99989
AAAm Colorado Local Government Liquid Asset Trust (COLOTRUST PLUS+) 13,774 45 83 63 0.99984
AAAm Virginia Local Government Investment Pool 12,277 51 95 73 0.99987
AAAm TEXPOOL Prime 11,902 32 78 61 0.99982
AAAm Local Government Investment Cooperative 10,089 38 72 55 0.99981
AAAm West Virginia Money Market Pool 9,809 28 67 55 0.99974
Source: S&P Global Ratings.

'AAAm' Local Government Investment Pools

The 'AAAm' LGIP trends report shows metrics of U.S.-domiciled LGIPs that seek to maintain principal value ($1.00) and limit exposure to principal losses due to credit risk, as defined in S&P Global Ratings' PSFR criteria.

LGIPs are present in many U.S. states where, generally, the state treasurer oversees a pooled investment vehicle that operates in a similar way to a money market fund. Typically a cost-effective investment option, LGIPs allow municipalities and public entities to combine their idle cash and operating balances to obtain economies of scale, through a diversified range of investments, to earn an incremental rate of return.

Unlike money market funds registered with the SEC, LGIPs are not regulated by the SEC and therefore not subject to SEC rule 2a-7. However, LGIPs typically benefit from the purview of state statutes, which provide guidelines on LGIPs' investment policy and objective, as well as from the standards and guidance of the Governmental Accounting Standards Board, where standard 79 allows the use of amortized cost to value an LGIP's portfolio assets.

Our LGIP metrics demonstrate the investment practices of 'AAAm' rated LGIPs and those conforming to our PSFR criteria. If an individual LGIP's metrics are below our benchmarks, this may indicate a more conservative approach to investment. Metrics well above our benchmarks may signal a more aggressive approach, albeit still within the range for a 'AAAm' PSFR.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Kara Wachsmann, Englewood + 303 721 4547;
kara.wachsmann@spglobal.com
Secondary Contacts:Michael Masih, New York + 1 (212) 438 1642;
michael.masih@spglobal.com
Andrew Paranthoiene, London + 44 20 7176 8416;
andrew.paranthoiene@spglobal.com

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